A salesman's solicitation of his former clients, coupled with his previous access to trade secrets, has led to enforcement of a non-compete spanning six states. In FirstEnergy Solutions v. Flerick, the U.S. Court of Appeals for the Sixth Circuit applied a deferential review of the Ohio district court's opinion enforcing that one-year non-compete. A PDF copy of the opinion can be found below. Background: Paul Flerick was a salesman for FirstEnergy. While negotiating the terms of his employment with FirstEnergy, Flerick expressed concerns about the proposed noncompete and attempted to negotiate a revision that would allow him to work for a competitor after leaving FirstEnergy as long as he did not directly contact FirstEnergy’s customers. FirstEnergy refused, telling him that it was a “[c]ondition of hire.” Flerick eventually capitulated and signed the agreement.
After receiving a negative review and reassignment, Flerick joined Reliant Energy, a competitor of FirstEnergy. After his resignation, FirstEnergy reminded him about his noncompete clause, and Flerick said that it would not be an issue. When asked about his plans, he declined to provide any information. Flerick was required to and did return all company-issued electronic devices and all company documents.
When FirstEnergy learned that Flerick was working for Reliant, it sent Flerick a cease-and-desist letter. Reliant’s counsel replied and indicated that Flerick did not possess any confidential information, had not solicited any customers to whom he sold electricity in the year before he left FirstEnergy, and that the provision prohibiting Flerick from working for a competitor was overly broad and unenforceable. After suing Flerick, FirstEnergy learned (and the District Court found) that Flerick had improperly solicited his largest customer from First Energy (Duke Realty) and that he also improperly contacted other FirstEnergy customers in Pennsylvania, New Jersey, Ohio and Maryland through intermediaries. The U.S. District Court for the Northern District of Ohio enforced the non-compete reasoning that Flerick had breached it by soliciting his former customers and because he still possessed confidential information that he had obtained while employed by First Energy. The court enforced the non-compete for the full year and in the six states in which First Energy did business. Last week, the Sixth Circuit affirmed that injunction, ruling that under Ohio state law, violation of the non-compete when coupled with the possession of confidential information was enough to warrant enforcement of that non-compete clause, even one over six states. Applying a very deferential review, the Sixth Circuit emphasized repeatedly the improper solicitations of former clients by Flerick as well as the fact that Flerick understood that the non-compete was a condition of employment. The Sixth Circuit reasoned that Flerick was free to operate in five other states in which FirstEnergy did not do business and was not unduly harmed by the injunction.
The Takeaway: First, it appears that Flerick's counsel tried the IBM v. Visentin defense -- i.e., arguing that efforts to safeguard the legitimate protectible interests of FirstEnergy would obviate the need for a non-compete. However, that effort was doomed by subsequent disclosure that Flerick had improperly solicited FirstEnergy's clients.
Second, this opinion demonstrates the deferential review accorded a trial court in injunctive relief proceedings and the importance of prevailing at the trial court level. The trial court was clearly unhappy about Flerick's solicitation of his former customers and enforcement of a non-compete throughout six states seems severe. However, the Sixth Circuit refused to disturb the injunction.
Finally, I have to confess I was disappointed with the Sixth Circuit's further justification for the non-compete because of Flerick's exposure to trade secrets of First Energy. Extended to its logical conclusion, any non-compete would be fully enforceable on this basis because most employees are inevitably exposed to confidential information of their former employer. Had the Sixth Circuit simply left the need to protect customer relationships as the basis for the non-compete, it would have been more than enough since it was Flerick's improper pursuit of those customers that drove the injunction.
FirstEnergy v. Flerick.pdf (133.92 kb)
Tags: non-compete, covenant not to compete
Injunctions | Non-Compete Enforceability | Ohio | Restrictive Covenants | Trade Secrets
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well one or two that I missed from the previous week:
Noteworthy Trade Secret and Non-Compete Articles, Cases and Posts:
Computer Fraud and Abuse Act Posts:
Cybersecurity Posts and Articles:
News You Can Use:
Tags: trade secrets, covenant not to compete, non-compete, cybersecurity
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Economic Espionage Act | IP Litigation | Legislation | Non-Compete Enforceability | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
The Acordia of Ohio v. Fishel case has taken an unexpected turn, as the Ohio Supreme Court has granted a request for reconsideration of its May 24, 2012 decision in which it refused to enforce a non-compete in the context of a corporate merger or reorganization because of the perceived shortcomings in the language of the non-competes before it. Former Appellate Judge Marianna Brown Bettman has a very thorough and excellent post of this highly unusual decision in her Legally Speaking Ohio Blog, which closely monitors proceedings before the Ohio Supreme Court. For those not familiar with the decision, the Acordia case involved an effort by a company to enforce a non-compete against several former employees who had signed covenants not to compete with a corporate predecessor. However, the non-competes in question did not specifically include language or provisions making clear that assignees or corporate affiliates were covered by the non-compete. The trial court, the First Appellate District (the court of appeals for Hamilton County, which includes Cincinnati) and ultimately the Ohio Supreme Court, all applied the specific language of the non-compete and found the failure to include language that applied the non-compete to assignees, successors or affiliates doomed its enforcement. Acordia had relied on an Ohio statute that provided that by operation of law all assets of the merged company transfer to the acquiring or new company.
The decision has apparently caused great consternation in the business community. Judge Bettman notes that Acordia had "heavy fire-power" in support of its request for reconsideration, as the Ohio Chamber of Commerce and a number of other businesses filed for reconsideration as amici in support of Acordia. She quotes the following language: “The heart of this case is a simple question: when a lawyer drafts a competition agreement for a corporate client, does the lawyer need to include “successors and assigns” language or not… [S]ince this Court issued its decision in this case, the Internet has been filled with advice and reminders to lawyers to include such language when drafting all their employment agreements and other corporate contracts.”
According to Judge Bettman, these business amici emphasized that this is not a mere matter of contract law but, rather that, under the Ohio constitution, it is the General Assembly, not the Supreme Court, that has the power to establish and modify state law and the General Assembly has made it clear that such language is not necessary when a corporation goes through a statutory merger.
The vote to reconsider was 6 to 1, which is intriguing because Acordia was a 4 to 3 decision. It will be interesting to see if any of the justices who voted with the majority are seriously considering changing their vote. Frankly, I am genuinely surprised by this development and I now believe that the Supreme Court may reverse itself and apply the majority rule permitting the transfer of non-competes after a merger or reorganization. I will keep you posted on any further rulings and developments in this important case.
Tags: Acordia, covenant not to compete, non-compete, Ohio
Intellectual Property | IP Litigation | Non-Compete Enforceability | Ohio | Restrictive Covenants
Computer Fraud and Abuse Act Cases and Posts:
Cybersecurity Posts and Articles:
Dupont v Kolon - Writ of Garnishment.pdf (86.82 kb)
Tags: trade secrets, cybersecurity, covenant not to compete, non-compete, DuPont, Kolon
Computer Fraud and Abuse Act (CFAA) | Cybersecurity | DuPont v. Kolon | Illinois | Intellectual Property | IP Litigation | Legislation | New York | Non-Compete Enforceability | Restrictive Covenants | Social Media | Trade Secrets | Weekly Wrap-Up Posts
Here are the noteworthy posts, articles and cases of the past week:
Trade Secret and Non-Compete Cases and Posts:
News You Can Use:
CBS v ABC Order 06 21 12.pdf (63.65 kb)
Cybersecurity | Inevitable Disclosure | Intellectual Property | Copyrights | IP Litigation | Patents | International Trade Commission | Mattel v. MGA | Non-Compete Enforceability | Restrictive Covenants | Social Media | Trade Secrets | Weekly Wrap-Up Posts
Computer Fraud & Abuse Act Cases and Posts:
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Intellectual Property | IP Litigation | Legislation | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
Cybersecurity Articles and Posts:
Tags: trade secrets, covenant not to compete, cybersecurity, non-compete
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Florida | Intellectual Property | IP Litigation | International | Non-Compete Enforceability | Ohio | Restrictive Covenants | Trade Secrets | Weekly Wrap-Up Posts
Earlier this week, I reported that the Ohio Supreme Court was still considering the Acordia of Ohio v. Fishel case, a dispute that pits the language of a covenant not to compete against an Ohio statute whose purpose is to facilitate the transfer of assets in a merger.
Yesterday, the Ohio Supreme Court issued its ruling in a 4-3 decision holding that the language of a covenant not to compete controls and will not be extended to the new company after a merger if the covenant's language fails to specifically assign its rights to the new company. (A PDF copy of the slip opinion can be found below).
I wrote about the Acordia case last fall. Four employees challenged their non-competes, arguing that after a series of mergers, their non-competes were no longer enforceable. They argued that the literal language of their covenants was confined to the previous employer and did not extend to future companies or use language extending the covenant to the company's "successors and assigns." When the employees left several years later, they argued that their non-competes had begun to run at the time of the merger and were now expired. The trial court and the Court of Appeals for the First District agreed.
The Majority Opinion: The Majority's analysis was simple: apply the contract as written. Since the covenant did not include assignees nor provide for the assignment to a successor, the relationship terminated when the employer ceased to exist as a result of the merger, and the non-compete began to run (although technically there was no longer any employer to benefit from the non-compete). Thus, under its terms, the covenant had expired before the employees left to join a new employer
The majority was not troubled that it was treating the non-compete any differently than any other asset. Since the previous employer had elected to limit the benefit of the contract to that company alone, the new company got the same bargain that the asset (the non-compete) provided -- namely, a non-compete confined to the previous company.
The Dissent: The Dissent, however, believed that the Ohio statute governing mergers, Ohio R.C. 1701.82 and 1705.39, should have controlled. Those statutes, by their operation, vested all the assets and obligations of a constituent entity in the surviving entity without reversion or impairment. The Dissent reasoned that a covenant not to compete should be treated like any other asset and should inure to the benefit of the new company. The Takeaway? Ohio employers and companies better check their non-competes. If their agreements do not broadly define the "Company" to include successors and assigns or do not include a provision permitting the assignment of the covenant, they will be deemed to begin running in the event of a merger, acquisition or reorganization and perhaps expire before an employee joins a competitor.
Further Thoughts (May 26, 2012): One point that needs to be made, after further reflection, is that, under the logic of the Acordia decision, any kind of corporate reorganization could result in the loss of the benefit of the covenant not compete, non-solicitation agreement or non-disclosure agreement. In other words, if a business decides to change from an "S" corporation to a limited liability corporation and its agreements fail to include "successor or assign" language or fail to include a provision permitting an assignment, the time periods of those agreements would begin to run at the time of the reorganization.
2012-ohio-2297.pdf (66.95 kb)
Tags: Acordia of Ohio, Fishel, Ohio Supreme Court, covenant not to compete, non-compete, Ohio
IP Litigation | Non-Compete Enforceability | Ohio | Restrictive Covenants
Having just given a presentation on current developments in Ohio Covenant Not to Compete law, it made some sense to write a post summarizing a number of the more recent noteworthy trade secrets and covenant not to compete decisions here in the Buckeye State over the past few months.
Two Big Decisions Due from the Ohio Supreme Court:
The Ohio Supreme Court has two important cases in which decisions are expected soon. Both address issues that are hot topics right now in the trade secret and covenant not to compete community.
The first opinion should be issued in the American Chemical Ass'n v. Leadscope, Inc. case, which addresses whether the plaintiff ACS's unsuccessful trade secrets case against its former employees and their fledgling company should give rise to a claim for malicious litigation. As two high profile cases have been brought recently against law firms and former employers for allegedly bringing trade secret actions in bad faith, this may prove to be a bellwether opinion. The ACS case also provides a lesson in the dangers of potentially overreaching in a weak trade secrets case, as well as the power of the "David v. Goliath" theme for juries.
As you might expect, the facts are fairly involved but essentially, ACS brought a claim against its former employees and their company, Leadscope, for allegedly stealing technology from ACS. In conjunction with the litigation, ACS also made it known that the technology was in dispute and made statements to others that Leadscope had improperly taken it from ACS, which substantially impacted Leadscope's ability to get financing and run its business.
At trial, the jury awarded over $26.5 million in compensatory and punitive damages to the defendants for their counterclaims of unfair competition (which was premised on a theory that the underlying litigation was malicious and in bad faith), intentional interference, and defamation; the judgment has swelled to $40 million with interest and attorneys fees. The individual defendants and Leadscope argued that ACS had commenced the litigation as part of a larger plan to disrupt, if not destroy, their new business.
The Supreme Court is most likely grappling with the issue of whether unfair competition may include a theory of malicious litigation, a contention that has troubled the State of Ohio enough that the Ohio Attorney General's Office filed an amicus brief and appeared and argued in support of ACS's position. Oral argument took place in September, so a decision should be forthcoming soon. For a good summary of the oral argument and some handicapping of how some of the Justices might rule, please see former Appellate Judge Marianna Bettman's Legally Speaking blog post on this decision. The other case, Acordia of Ohio v. Fishel, involves another hot topic -- namely, whether non-competes with four employees survived a series of successive mergers. (See my post on the OfficeMax v. Levesque case out of the First Circuit, which grappled with a similar issue).
In Acordia of Ohio, the trial court refused to enforce the non-competes because they were confined to the specifically named former employers, which had changed over time after a series of successive mergers. After each merger, the company holding the specific non-compete disappeared. According to the trial court, this effectively terminated employment under each non-compete and triggered the time period of each non-compete. By the time the four employees decided to leave and join a competitor, each of their non-competes had expired under this analysis.
The First Appellate District in Hamilton County (the county where Cincinnati is located for you out-of-staters) affirmed the ruling late last year, looking not only at the language of the agreements in question but relying on Ohio statutory law to support its holding (citing in particular, Ohio R.C. 1701.82(A)(3)), which deals with the legal effects of a merger of Ohio corporations). The First District relied on older Ohio Supreme Court authority holding that "the absorbed company ceases to exist as a separate business entity" and that "[b]ecause the predecessor companies ceased to exist following the respective mergers, the Fisher team's employment ceased to exist following the respective mergers, the Fisher team's employment with those companies was necessarily terminated at the time of the applicable merger."
As I wrote last fall, this case pits the shortcomings of the covenant's language against the common sense notion that something worth protecting survived the merger. Judge Bettman has a post on the oral arguments on this case as well. Again, a decision should be forthcoming soon.
Other Noteworthy Decisions:
The Tenth District Court of Appeals (which covers Franklin County, the county that includes Columbus, Ohio) issued two trade secret decisions on December 30, 2011. I wrote about one, Columbus Bookkeeping & Business Services, Inc. v. Ohio State Bookkeeping, Case No. 11AP-227 (Dec. 30 2011), in which the Tenth District took the unusual step of reversing a preliminary injunction issued against several former employees who were alleged to have misappropriated a customer list. The Tenth District was unimpressed with the trade secret bona fides of that customer lists and seemed troubled about the absence of a non-compete. The Tenth District also issued an opinion in Columbus Steel Castings Co. v. King Tool Co., 2013 Ohio 6826 (10th Appellate Dist. Court of Appeals, Dec. 30, 2011), affirming the trial court's entry of a permanent injunction imposing a royalty even though the jury had declined to award damages for the misappropriation of trade secrets by the defendant. For more on this case, see Seyfarth Shaw's Trading Secrets blog post discussing this opinion. In February, U.S. District Court Judge Michael R. Barrett denied a motion for a TRO because the plaintiff had publicly posted its alleged trade secret information online. In Allure Jewelers, Inc. v. Ulu, No. 1:12cv91, 2012 WL 367719 (S.D. Ohio Feb. 3, 2012), Judge Barrett emphasized that Allure’s Complaint failed to show any reasonable efforts of secrecy regarding pricing information, which was made publicly available on Allure’s website. Seyfarth Shaw's Trading Secrets has a post on this case, also. Finally, as I wrote last month, the Stark County Court of Common Pleas (Canton, Ohio) issued a ruling that may have significant repercussions within the radio and television industry and the manner in which they draft their non-competes in the future. In DeLuca v. DA Peterson, Judge Charles E. Brown, Jr. found that a radio station's covenant not to compete did not prevent two radio co-hosts from launching an online streaming music website.
Judge Brown reasoned that the covenant only prohibited the former employees from running a business that was "the same or essentially the same as a commercial radio station." He concluded that that the new online venture fell outside the language of the non-compete because it did not use the public airwaves, required no FCC license, was not regulated by the FCC, and was not subject to the 60 mile transmission radius restricting radio stations. (A PDF copy of the opinion, which came out several days after his ruling from the bench, can be found here).
Tags: Ohio, trade secrets, non-compete, covenant not to compete
Injunctions | Intellectual Property | IP Litigation | Non-Compete Enforceability | Ohio | Restrictive Covenants | Trade Secrets
Here are this week's notable posts, articles and links:
Trade Secrets and Covenant Not Compete Posts, Articles and Links:
China and Trade Secrets:
Computer Fraud & Abuse Act Articles and Posts:
Krajacich v. Great Falls.pdf (144.86 kb)
DeLuca v. DA Peterson.pdf (1.13 mb)
Tags: trade secrets, cybersecurity, covenant not to compete, non-compete
California | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Intellectual Property | IP Litigation | Patents | International | Legislation | New York | Non-Compete Enforceability | Ohio | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
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